Estate Settlement Process of Life Policies
The estate settlement process for life policies is usually the fastest compared with the settlement processes for other personal assets. This is because if proper planning is done, the pay-out can be carried out without the letter of administration or grant of probate. If proper paperwork is submitted, and the death of the deceased is straightforward (i.e. not self-inflicting), the proceeds can be paid usually within one to two weeks. This makes it an important (and sometimes the only) financial tool to provide estate and beneficiaries with immediate access.
This article will show you the legal and operational aspects of a life policy pay-out, and how you should take planning advantage on these laws for your estate planning. The life policy here refers to the life product issued by an insurance company; it can be in the form of a whole life policy, endowment policy, term policy, investment-linked policy, single premium investment-linked policy, annuity contract or personal accident policy.
A life insurance company relies on two sections of the Insurance Act (i.e. Section 61, 49L & 49M), and 1 section of the Conveyancing and Law of Property Act (i.e. Section 73) to pay-out the death proceeds to your beneficiary. This is important because the insurance company can then discharge its liability in good order, otherwise it might be liable to pay again if the proceeds are paid to the wrong party. They are as follows:
Section 61 of Insurance Act (Chapter 142)
This is the most common legal principle to pay-out the proceeds without letter of administration or grant of probate from the deceased estate. An insurance company can pay up to $150,000 to a proper claimant.
Proper claimant can be one of the following:
a. Administrator or Executor of the deceased estate;
b. Widow;
c. Widower;
d. Parent;
e. Child (legitimate or illegitimate);
f. Brother;
g. Sister;
h. Nephew;
i. Niece of the deceased.
Besides the death certificate and the duly completed claim form, the proper claimant needs to produce the necessary documents to prove the relationship; for example marriage certificate, birth certificate, identity card, adoption papers etc.
Points to pay attention to:
(i) Even though the cheque is paid to the name of the proper claimant, it does not mean that the proper claimant is entitled to the money. He/she is responsible for distribution of the money according to the will or Intestate Succession Act (if there is no will).
(ii) Similar to point (i), if the deceased is a Muslim, the proper claimant is responsible for distribution of the death proceeds according to the Certificate of Inheritance (COI) issued by the Syariah Court of Singapore.
(iii) If the death proceeds are more than $150,000, the balance of the proceeds will be paid to the estate of the deceased when a letter of administration or grant of probate is produced. Note that at this time, the cheque will be made payable to the “estate of the deceased”.
(iv) If the proper claimant is a bankrupt or facing an impending lawsuit, it is advisable to get another proper claimant to claim the death proceeds.
(v) This act also applies to endowment or investment linked policies bought with the CPFIS fund, as well as the Dependent Protection Scheme (DPS) policy.
(vi) For a couple going through a separation leading to a divorce; if death occurs during separation, the surviving spouse will still qualify as proper claimant, even though the relationship could be sour.
(vii) A co-habiting partner does not qualify as proper claimant even though the relationship can be very close. For example, your partner could be the mother (or father) of your child, but if both of you are not legally married, your partner will not qualify as a proper claimant to your life policies.
Section 73 of Conveyancing and Law of Property Act (Chapter 61)
The next most common law which life insurance used to pay-out the death proceeds is Section 73 of the Conveyancing and Law of Property Act (CLPA). This is commonly known as Sec 73 policy. Prior to 2009, when a policy applicant intentionally or unintentionally names his (or her) spouse or children as beneficiary of a life policy, a statutory trust is created. The effect of this law make the death proceeds a separate estate. The life insurance company will make full payment to the trustee of the policy. The trustee will have the legal responsibility to keep or distribute the money to the beneficiary as spelled out in the policy.
Points to pay attention to:
(i) Unlike Section 61 of Insurance Act which the insurer is limited to $150,000, the life insurance company using Section 73 of CLPA can make full payment to the trustee of the policy.
(ii) The trustee, in most cases, is the same person as the beneficiary. For example, a man would arrange a life policy, and put his wife as beneficiary as well as trustee of the policy.
(iii) The trustee, in some cases, may not be the spouse. For example, Mary is a single parent, she can arrange a life policy for the benefit of her young child, and name her sister as the trustee.
(iv) The policy proceeds are completely protected against estate creditors. In fact, this is one of the main advantages of a Sec 73 policy.
(v) The people who qualify to be beneficiary in a Sec 73 policy are limited only to the spouse or children of the life assured.
(vi) After 1 September 2009, the policy holder can only arrange a statutory trust policy through another section of the law, i.e. Section 49L of the Insurance Act.
Section 49L of Insurance Act (Chapter 142)
After 1 September 2009, a policy applicant can only effect a trust nomination on his life policy through Section 49L of the Insurance Act. Section 73 of CLPA will continue to apply to policies put into effect before 1 September 2009.
The settlement of the death proceeds is similar to Sect 73 of CLPA, where the life insurance company will pay-out the proceeds to the trustee of the policy. The trustee has the legal responsibility to hold or distribute the money to the beneficiary stated in the policy.
The life insurance company is not limited by the $150,000 rule, and can make full payment to the trustee.
Points to pay attention to:
(i) Only spouse and children qualify to be beneficiary of a S49L policy.
(ii) The death proceeds are protected against the estate creditor.
(iii) Divorce and re-marriage will not automatically revoke the trust nomination. The nomination can only be revoked with the agreement of the trustee and beneficiary.
Section 49M of Insurance Act (Chapter 142)
After 1 September 2009, the policy applicant can effect a revocable nomination on his life policy through Section 49M of the Insurance Act. This is one of the best ways of settling claim proceeds because life insurance company can pay-out the entire proceeds to the beneficiary named in the nomination form without the letter of administration or grant of probate (if the claim proceed is claimed under section 61 of insurance act, life insurance company can only pay up to $150,000 without letter of administration or grant of probate).
Points to pay attention to:
(i) There are no relational restrictions on who can be the beneficiary in your S49M policy. Other than the traditional beneficiaries like spouse and children, you can also nominate the following as beneficiary:
a. Elderly parents
b. Siblings
c. Friends
d. Co-habiting partner
e. Girlfriend or boyfriend
f. Institutions (e.g. church, temple, non-profit organisation etc.)
(ii) The cheque will be payable to the beneficiary and not the estate of the deceased.
(iii) The proceeds are not protected against estate creditors (unlike S49L or S73 (CLPA) policy).
(iv) Divorce, re-marriage and death of beneficiary will not revoke the nomination. However, policy owners can revoke the nomination anytime without seeking consent from the beneficiary.
